Liability for misleading and deceptive promotional activities of a subsidiary

Liability for misleading and deceptive promotional activities of a subsidiary

Background

In 1999, Austcorp International Ltd (Austcorp) became involved in the development of a waterfront resort on the Central Coast of New South Wales.  The marketing and management of the development was contracted to Austcorp Development Management Pty Ltd (ADM), a subsidiary of Austcorp. 

During the course of the marketing and promotion of the apartments in the resort, certain representations were made to prospective purchasers regarding a 7% guaranteed net return and the identity of the proposed operator of the resort. Such representations were subsequently held to be misleading and deceptive and it was held that small print in the contracts of sale did not correct or displace the earlier misleading representations.

Less than 2 years after the purchase price was paid, the resort performed poorly and the applicants commenced proceedings against Austcorp alleging that it had engaged in conduct that was misleading or deceptive in breach of section 52 of the Trade Practices Act 1974 (Cth). 

Austcorp maintained that any misleading and deceptive conduct should be brought against ADM as the development and management agreement made it clear that ADM was responsible for the marketing and promotion of the apartments.

Decision

It was held that Austcorp made misleading representations notwithstanding that it had no direct contractual involvement with the applicants.  The Court was of the view that Austcorp conducted itself in trade and commerce as the promoter of the resort for a number of reasons, and noted the following:

• during the construction of the resort, the word “Austcorp” was used together with the Austcorp logo on a large sign on the construction site;
• promotional brochures featured the Austcorp logo (without identifying a particular Austcorp company);
• Austcorp’s name and logo appeared in letters to purchasers of the apartments in connection with the resort project; and
• suppliers to the development of the resort addressed invoices to Austcorp rather than ADM, which Austcorp subsequently paid (although bookkeeping entries were internally allocated to ADM).

The decision also highlighted the significance of the Austcorp logo on the brochures and leaflets where the conduct of Aust­corp created a situation in which people would associate it in trade or commerce as the promoter of the resort.  However, the message which Austcorp wished to pass to the public was that it, as the ultimate owner of the brand, was responsible for the development.  

The court rejected Austcorp’s argument that the corporate veil should shield their responsibility from the conduct of ADM as Austcorp was the hands and brains of its subsidiaries’ conduct and cannot evade responsibility for any contravention of section 52 by seeking to rely on the corporate veil.

Implications

A parent company’s direct or indirect involvement in a business project of their subsidiary can potentially expose the former to liabilities under the Trade Practices Act, notwithstanding the contractual arrangements in place to protect against liability.  When making representations to potential clients it is beneficial that the representations made are accurately reflected in formal contract documents in order to negate potential false and misleading claims.   

It should be noted that Austcorp has been granted leave to appeal to the Full Federal Court.